The Dow Jones Euro Stoxx 50 index of Europe's biggest companies gained 4.5 percent this year through March 14 vs. 0.20 percent for the Dow Jones Industrial Average
DJIA, +0.09%
In 2004, the European index rose 4.5 percent vs. 3.6 percent for the Dow.

Economic prospects for euroland are less rosy. The European Central Bank, which decides monetary policy for the region, shaved growth forecasts earlier this month to 1.6 percent from 1.9 percent for 2005 and to 2.1 percent from 2.2 percent for 2006, owing to signs of weakening productivity in Germany and Italy.

Tony Dolphin, director of economics and strategy for Henderson Global Investors in London, said Europe's stock performance is more robust than the region's sluggish economy would suggest.

"But you have to remember," he added, "we're not buying GDP growth; we're buying shares in companies. For the prospect of profit growth, it's just as good in Europe as in the U.S."

A Merrill Lynch survey of global fund managers taken in early March showed increasing interest in eurozone equities, while backing away from U.S. stocks. See full story.

On a price-to-earnings basis, European companies are trading at an average of 14 times forward earnings, whereas the U.S. market is trading around 16.5 times, Dolphin noted.

One reason for weaker continental growth is sluggish consumer spending, which itself is due to slower employment growth from corporate cost-cutting. But the change should benefit investors, Dolphin said.

"They're doing the restructuring American companies undertook years ago to really continue to compete in the global economy," he said. "The fact that growth in Europe is so weak is actually positive for corporate profits and positive for the equity markets."

German engineering giant Siemens
SI, +5.36%
(723610), for example, was upgraded to "buy" from "hold" at Dresdner Kleinwort Wasserstein, which called Siemens a "restructuring play par excellence."

Last year, Siemens issued an ultimatum to staff at a mobile phone plant in Germany to work longer hours for the same pay or face layoffs. The employees' union agreed to longer hours.

But Dolphin said investors still need to be careful about exposure to European companies that are heavily involved in the consumer sector, such as retailers.

"One would be looking more to the global companies -- where they can benefit from strength of demand in the U.S. and Asia and anywhere else -- as being the more attractive," he said.

Buying the heavy hitters

U.S. investors holding European stocks have seen tremendous currency benefits from a weak dollar, which declined 20 percent against the euro in 2004 and has continued to weaken. Dolphin's year-end euro forecast is $1.40, vs. a current level of around $1.33.

Stocks in the EuroStoxx50 can be found in the global and international mutual funds of many U.S. investors: Finland's Nokia
NOK, +0.44%
; Royal Dutch/Shell Group
RD
and French oil giant Total SA
TOT, -0.35%
are all heavy hitters within the index, for example, with oil stocks particularly dominant.

Many of these bigger European companies have a multi-national presence, Dolphin said. "You're not necessarily buying a European economy," he added. "You're buying the global economy."

Fund managers are divided about oil company stocks. "At the moment, [oil stocks] are risky because, to be honest, I don't think anyone with any degree of confidence can say where oil prices will be in six months' time," Dolphin said.

But Jim Moffett, manager of the UMB Scout Worldwide fund
UMBWX, -0.16%
is more optimistic, noting that tight supply and strong demand is positive for oil-related stocks. His fund holds Total, Spain's Repsol
REP, -0.61%
and Austria's OMV
OMVKY, -0.72%
which isn't in the EuroStoxx50.

Matt Pickering, senior research analyst for ICAP Euro Select Equity
ICEUX, -0.76%
said that his fund's "most desirable opportunities" are multinational blue chip companies domiciled in Europe, but which compete globally and are priced inexpensively.

"The U.S. market reflects the strong profitability of the strong U.S. companies -- there are no discrepancies between price and value. In Europe, discrepancies have narrowed, but still exist," Pickering said.

Watch for bigger trends

Gilman Gunn, portfolio manager for Evergreen International Equity
EKZAX
said the outperformance of the Euro Stoxx 50 vs. U.S. markets hints at a wider trend.

"Emerging markets are doing well and small caps internationally are doing well. It's part of an overall, better market trend outside the U.S.," he said.

In addition to better valuations and the restructuring theme, dividend yields also are more attractive in Europe, he said - 2.91 percent for the Euro Stoxx 50 vs. 2.27 percent for the Dow Jones Industrial Average and 1.98 percent for the S&P 500.

German utility RWE (703712) in February said it planned to raise its dividend 20 percent to 1.50 euros, and Vivendi Universal
V, +0.04%
(012777) recently announced its first dividend in three years.

European investors who have historically preferred bonds and cash are also looking at their home markets and seeing better returns from stocks, Gunn said.

He recommends French retailing giant Carrefour (012017), which is coming off of a tough three-year period. Carrefour sells consumer staples and other household goods.

Gunn also likes Vivendi Universal, which he said is "doing everything right." Vivendi recently posted a profit for 2004, its first in four years. "It's a big change from the past. They're running the company for shareholders now," Gunn said.

Martin Schulz, director of international equity for the Armada funds, is watching the situation between Europe's bigger and small cap companies closely, noting the latter has outperformed for five consecutive years. Large-cap stocks are due to catch up, he said.

The Armada International Equity
AMIEX
fund holds many companies in the EuroStoxx50, such as Dutch supermarket Ahold
AHO
(33181), Total and financial services group ABM Amro
ABN, -11.11%

Schulz said that the fund's large-cap bias hasn't worked so well over the past year. Still, he said he expects patience to pay off.

He added: "The larger caps are going to do a bit better because they've got the economies of scale to continue to grow and provide the type of performance investors are looking for."

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